Report
Alicia Garcia Herrero ...
  • Kohei Iwahara

BoJ juggling multiple risks with scarce policy ammunition: What’s next?

As the global risk aversion has recently intensified, the stronger Yen and the negative JGB yields are putting increasing pressure on the BoJ to react. In fact, after the JGB yields fell into the negative territory in 2016, the BoJ introduced the so called Yield curve control measure, to avoid too negative rates along the yield curve harming the banking sector and, thereby, the economy. We hold the view that, that the BoJ will probably prefer to preserve its scare ammunition at this conjecture, which would also protect its reputation from frequent policy changes. While it is uncertain how the ongoing global ris k aversion will unfold, the BoJ has one important reason to standby, namely the negative consequences from the consumption tax hike planned in October. For the moment, the BoJ could literally treat the 0% on the 10 year JGB yield as a target with a loose range, thus allowing the bond yield to fall into the negative territory. Although a flatter yield curve would squeeze banks’ profit margins, the BoJ may only start considering cutting the policy rate next year , given the increased probability of a recession following the tax hike. On a theoretical ground, the BoJ could lower the policy rate and the target on the 10 year JGB yield simultaneously, to ensure the positive slope of the yield curve. However, this would mark a dramatic turnaround in its monetary policy. Unless the Fed changes direction, which could lead to a yield curve inversion in Japan , the BoJ would certainly want to save its scarce ammunition until the negative effects of the spike in global risk aversion become more visible.
Provider
Natixis
Natixis

Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.

 

Analysts
Alicia Garcia Herrero

Kohei Iwahara

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